In the rational expectations view, the best approach to fiscal policy is for the government to:
A) Cut taxes
B) Balance its budget
C) Eliminate transfer payments
D) Fix government spending

Question

Quizplus · Accepted Answer

In the rational expectations view, individuals and firms form expectations about the future based on available information, including government policies. If the government implements expansionary fiscal policy, such as increasing spending or cutting taxes, individuals and firms may anticipate future inflation and adjust their behavior accordingly, leading to higher interest rates and reduced investment. On the other hand, if the government implements contractionary fiscal policy, such as reducing spending or increasing taxes, individuals and firms may anticipate future recession and adjust their behavior accordingly, leading to lower interest rates and increased investment. However, if the government consistently runs budget deficits, it may be perceived as unwilling or unable to control its spending, leading to expectations of future inflation and higher interest rates. Therefore, balancing the budget can help to stabilize expectations and maintain the credibility of the government's fiscal policy.

In the Rational Expectations View, the Best Approach to Fiscal